3 ETFs That Work Better Together for Dividend Investors

When constructing a portfolio, many investors end up creating a collection of recent high-performing funds rather than a diversified one. This can lead to a high overlap in holdings, defeating the purpose of diversification. This is particularly problematic for those who own S&P 500 ETFs, growth ETFs, and tech ETFs, as they often share similar top holdings.

A signal recently flashed for Nvidia, a little-known chipmaker that saw significant gains in 2009. Now, a similar signal is appearing for a company 1/100th the size of Nvidia. This principle also applies to dividend ETFs; investors should seek ETFs that build on each other's strengths and provide benefits while minimizing downside risk. Here are three funds to consider for a diversified dividend ETF portfolio.

The State Street SPDR Portfolio S&P 500 High Dividend ETF (NYSEMKT: SPYD) is a high-yield dividend strategy that targets the 80 highest-yielding stocks from the S&P 500 and equal-weights them. It currently offers a yield of 4.4%, but its rate sensitivity is a concern, as roughly 25% of the portfolio is invested in REITs, consumer staples, financials, and utilities.

The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) focuses more on balance sheet strength and durability and considers a stock's dividend history, yield, and fundamental metrics. It has a yield of 3.2%. The iShares Core Dividend Growth ETF (NYSEMKT: DGRO) requires a five-year track record of consecutive dividend increases and a payout ratio screen for sustainability, with nearly 400 stocks included.

Combining these three ETFs offers true diversification and risk management, with only a 20% overlap between SCHD and the other two funds. However, this portfolio is vulnerable to rising interest rates and has less tech sector exposure. Despite these risks, the funds' balance sheet health, yield, and durability factors are their biggest advantages.